Bonds

Credit derivatives risk shrinks – or does it?

25 Sep 2008

The face value of the credit default market actually shrank in the first half of the year, to only $55 trillion. That s a good sign in terms of removing unnecessary tangles from the market. But it doesn t mean there s any less risk being taken.

Rehypothecation mess exposed by Lehman collapse

24 Sep 2008

Lehman used $22bn of hedge funds collateral for its own purposes. This murky practice rehypothecation provided funds with cheap leverage in good times. But they are now in a long line of creditors. The practice should be changed though doing so will raise hedge fund costs.

Pakistan, troubled but perhaps not forsaken

24 Sep 2008

Pakistan s economic situation looked dire before the credit crunch. Now investors are scrabbling for safe havens, Pakistan looks less stable than ever. Default is a possibility, but Pakistan s political distress may actually help it avert that particular disaster.

New York’s credit derivatives plan is flawed

23 Sep 2008

The state wants its insurance watchdogs to oversee CDS. Proper marketwide clearing mechanisms which are in the works would do that more effectively. The New York plan could disrupt credit markets at the worst possible time, and push business out of the state.

Exclusive: JPMorgan squares off with Citadel

18 Sep 2008

A hiring spat, not credit quality, seems to be the reason for the US bank s decision to restrict trading with the $20bn hedge fund. But not everyone passing along rumours is aware of Citadel s raid on JPMorgan staff. The timing looks terrible for such a petty fight.

Lehman contagion hits top-rated borrowers

18 Sep 2008

Regulators hoped the firm could fail without too much pain. But fallout from its bankruptcy hit moneymarket funds and so sucked liquidity out of the $1.8tr commercial paper market, causing borrowing costs to soar. Such unpredictable consequences make the watchdogs' job harder.

Bailout bet batters Lehman bondholders

16 Sep 2008

Investors who held its debt, expecting the government to bail them out even as Lehman s share price plummeted, are nursing total losses over $100bn. Now, with rescues apparently off the table, the cost of debt for troubled firms where it s available at all could rise sharply.

Market right to cast gimlet eye on US credit

10 Sep 2008

Default risk, even after taking responsibility for the GSEs $5.4 trillion of liabilities, remains miniscule. But credit traders think the US is now less of a sure thing. They re right to be sceptical the US could have to pony up more than it hopes to save the mortgage giants.

Options running out fast for Lehman

9 Sep 2008

It needed a capitalboosting deal before reporting earnings, set for next week. Tuesday s 45% stock price plunge suggests investors won t wait even that long. Sure, Lehman shouldn t be at risk of going under. But CEO Dick Fuld may be out of chances to keep the firm independent.

The next nasty surprise for US housing and banks?

3 Sep 2008

Many hope US home prices will recover enough in the next few years to head off mass defaults on the $200bn of option adjustablerate mortgages outstanding. That looks increasingly farfetched. The loans may reset sooner than expected causing a new wave of delinquencies.

Wall Street loses the protection of history

7 Aug 2008

Its woes from SIVs to monolines had already undermined investors trust in track records. Now regulators browbeating of Citi over auctionrate securities means Wall Street will find it harder to use good past performance as a defence when markets hit the skids.

ABS vulture funds are ravenous – for now

29 Jul 2008

Dozens of firms have raised perhaps $100bn between them to buy distressed paper. But not all will be gifted the funding leverage Lone Star and Blackrock got from Merrill and UBS. That makes soaking up $1tr or more of problem assets harder. Potential sellers shouldn t wait around.

Paulson unveils another damp squib

28 Jul 2008

The US Treasury secretary is right that covered bonds can be a good way to fund mortgages. But their use didn t prevent property busts in Spain and the UK. And pushing for them in the middle of a housing bust won t do much, if anything, to kickstart the market in the US.

CDS marketplace is quietly growing up

21 Jul 2008

Bear Stearns role in the credit default swap market may have forced the Fed to rescue it. Still, the $62 trillion CDS market has survived the credit crunch and may have eased it in some ways. There are hurdles ahead, but the market increasingly looks to have staying power.

Agency debt trades on Panglossian assumptions

16 Jul 2008

The proposed bailout of mortgage giants Fannie and Freddie has given a big boost to their debt. Spreads are now back in line with their historic levels. Yet terms of the bailout are unknown. With so much uncertainty, larger spreads seem warranted.

Bureaucrats should stay out of CDO mire

14 Jul 2008

US legislators want to bar rating firms from slapping tripleAs on structured finance deals not first blessed by the SEC. But that's not regulators' expertise. Instead, they should eliminate perverse incentives by forcing banks to hold more capital against newfangled deals.

Fannie-Freddie containment is crucial

11 Jul 2008

If US policy wonks handle the crisis poorly, the mortgage giants woes could spread throughout the economy with dire consequences for banks, consumers and the government itself. Decisive action is called for, but the pain should be spread gradually.

Fannie, Freddie are US government’s monster SIVs

10 Jul 2008

Like the banks that ignored their contingent exposures to offbalancesheet vehicles during the boom years and lost billions when things soured, the US chose to pretend it wouldn't ever have to back the mortgage giants. Now it faces an unpleasant reality.

Moody’s mea culpa doesn’t restore confidence

1 Jul 2008

The rating firm s admission that employees glossed over CPDO rating errors is no surprise. It is acting to prevent a recurrence. But when ratings have broad implications or, as with CPDOs, when they are in the spotlight, executives are bound to feel pressure to finesse errors.

Carbon emissions projects ripe for ratings

25 Jun 2008

It s often cheaper to limit carbon emissions in poor countries than in rich ones. Yet many projects have disappointed, or worse, been scams. Independent watchdogs could provide a useful service to investors in these projects.